With less than 50 days to go until the US Presidential election the big question on investor’s minds is how will the market react? Many argue that looking at past elections is fruitless given the “unprecedented” nature of the current election, although the same argument is made time and time again during nearly every US Presidential election. Our analysis suggests that historically markets are largely ambiguous leading up to a presidential election, with S&P 500 performance near flat. And in the 12 months after an election market performance is positive, but not materially different from those years without an election. Importantly, the market’s post-election momentum has historically occurred regardless of whether a Democrat or Republican wins, or there is a change in party.
To analyze the election impact on markets we began by going back to 1960 and computing the 12 month performance of the S&P 500 from November to November each year. Historically market performance has been positive (as you’d expect over a rolling 12mo period), with the market increasing an average 8.1% over the 12 month period. In addition, performance was negative just 20% of the time.
We then went back to 1960 and analyzed S&P 500 data for the three months before and 12 months after a US Presidential Election. Our analysis showed that on average markets moved 8.3% higher in the 12 months after an election, similar to the average performance of markets over any rolling 12 month period from November to November. However, negative performance was more likely following an election vs. regular year. Of the 15 election years we analyzed, 33% of the following 12 month periods had negative performance.
We then analyzed market performance using political layers to determine if markets preferred Republicans, Democrats, or a change in party. Interestingly, a win for the incumbent political party yielded the best result, followed by Democratic candidate wins. In all scenarios, except a party switch from Democrat to Republic, the 12 months following an election led to stronger markets.
Post Election: Digging into market performance
To build a better picture of what it feels like living through a post-election environment we averaged the market’s daily movements across all 15 previous elections into one indexed performance. The blended performance suggests that there is a modest rally in the first 3 months following an election, with any potential pullbacks more likely to occur in 2Q.
Expanding upon the average line we overlaid standard deviation bands to help account for “unprecedented” or black swan events. Looking at a more negative case scenario (a -2 standard deviation event or a “two sigma event”), historic market patterns would signify a drawdown of 20% to 25%. On the flip side, an outside rally could drive a +40% market year.
Presidential election portfolio strategy
Looking through the results we draw two conclucions.
First, the historic post-election market performance is largely in-line with what a long-term investor could expect to see in any one year period from November to November.
And second, there does not appear to be a significant correlation to market performance with US Presidential Elections, or even to political party changes around those elections.
Predicting elections is difficult, and even harder is predicting markets. Looking ahead markets may become more volatile are presidential debates occur and rhetoric around the election increases. We urge investors to do their best to ignore the “noise” and maintain a long-term point of view and focus on proper portfolio construction and discipline.
ENDNOTES
Disclosures
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.